Better to invest in gold or cryptocurrencies?
Both gold and cryptocurrencies have gained prominence in investment portfolios. They are very different, almost antagonistic, assets. Gold is much more stable and is considered the safe haven asset par excellence in times of crisis such as the current one. In contrast, the cryptocurrency market is highly volatile and can generate large gains, but also huge losses.
Gold and cryptocurrencies are investment assets with very different characteristics and behaviour. To begin with, gold is a tangible asset, with limited reserves, while cryptocurrencies are intangible assets, whose value depends largely on speculative manoeuvres.
Moreover, the gold market is mature, while the cryptocurrency market is much more recent and dynamic. The proliferation of cryptocurrencies has led to a more than tenfold increase in just two years.
One characteristic of gold that sets it apart from most financial assets is that demand comes from a variety of sources, from central banks and private investors, who accumulate gold bullion and coins, to the jewellery industry and digital device manufacturers, who use gold in the creation of their products.
After a small decline in 2020, gold demand in 2021 returned to over 4,000 tonnes. Just over half (53%) went into the creation of jewellery, 28% was converted into bullion and coins, 11% was purchased by central banks and similar institutions and the remaining 8% was used in the manufacture of electronic devices.
Gold consumption grew in all four areas, although it was particularly strong in jewellery, where it rose from 1,327 tonnes in 2020 to more than 2,220 tonnes in 2021.
The high demand for gold in this industry is based not only on its aesthetic qualities, but also on its malleability and ductility. But the precious metal is also a key component of electronic devices, from mobile phones to televisions, as it is an excellent conductor of electricity and heat.
Central banks and private investors accumulate gold to protect their wealth. Indeed, countries hold huge reserves of this precious metal because they know that its value will not fluctuate greatly, as a limited amount is mined each year.
Despite what you might think, gold ownership is highly fragmented. The reserves of the largest gold owner, the US government, account for only 4% of the total. In fact, almost half of the precious metal is in jewellery scattered around the world and just over 20% belongs to investors accumulating gold bullion or gold coins. Nor is gold mining concentrated in just a few hands, with no single continent accounting for more than 30% of global production.
When it comes to bitcoin, the most important cryptocurrency, both ownership and computing power are less widespread. Only 2% of bitcoin holders accumulate 95% of all available bitcoins. And in 2021, entities in five countries controlled 80% of the computing power of the bitcoin network.
Because gold has multiple uses, its price is more resilient to economic swings than that of many other assets. When times are lean, investors buy gold as a safe haven. And when economies are doing well, consumers buy more jewellery and electronics that use gold.
Stability or volatility?
Between September 2021 and September 2022, gold has appreciated by 11%. In contrast, in the same period bitcoin lost half of its value due to speculative manoeuvres. On the other hand, gold can be considered a more liquid asset than many of the cryptocurrencies.
Some studies show that investors view cryptocurrencies as a high-risk, high-yield speculative bet, as their price swings wildly. In contrast, gold is much more stable. Therefore, both assets can have a place in a diversified and balanced portfolio. However, it is not advisable to allocate more capital to cryptocurrencies than you can afford to lose.
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